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TMI Blog2019 (4) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law, the Ld. CIT(A) was right in deleting the addition on account of extensive repairs and renovation of the leased premises without appreciating the fact that these expenses were capital in nature and that the Explanation to section 30 also provides for treatment of expenses as Capital Expenditure for rented premises." 2. " Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the expenses on repairs and renovation, as per para 1 above, were of enduring nature and were not in the form of current repairs" 3. " Whether on the facts and circumstances of the case and in law, the Ld. CIT{A) has erred in admitting additional evidences in form of invoices/ bills and not granting opportunity to the AO under Rule 46A to give comments" 4. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." 5. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing and sale of food products. During the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and renovation of Jalal Bakery at Bandra. The AO referred to Explanation 1 to Section 32 of the 1961 Act to hold the said expenditure was capital in nature. The AO , thus held that repair and maintenance expenditure of Rs. 77,17,043/- pertaining to Jalal bakery at Bandra be treated as capital expenditure and the same was not allowed as Revenue Expenditure as claimed by the assessee. However, the AO allowed depreciation u/s. 32(1) of the 1961 Act. 3.3 The AO further observed from ledger account of Repair and Maintenance Expenditure Account that the assessee has incurred an amount of Rs. 10,26,725/- for setting up of kitchen equipments/ renovation of kitchen at Jalal Bakery at Bandra and outlet at Colaba. The AO also held the said expenditure to be capital in nature as in the opinion of the AO the said expenditure was having benefit of enduring nature. The said expenditure was classified by the AO as Plant and Machinery being kitchen equipment and depreciation at an applicable rates was allowed by the AO, vide assessment order dated 31.03.2015 passed by the AO u/s 143(3) of the 1961 Act. 4. The assessee filed first appeal with Ld. CIT(A) challenging the additions to the income m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on repairs and maintenance by holding that the said expenses have not been incurred in the ordinary course of business but for the purpose of receiving enduring benefit for subsequent years. The Ld. AO further erred in holding that the expenses are in the nature of capital expenditure and not revenue expenditure when admittedly, the Appellant only pays a rent of Rs. 1,00,000/- (Rupees one lakh) for the tenanted premises at Bandra, and thus, for the renovation expenses incurred at the said premises, the rent payable by the Appellant stands reduced, which benefit is in the revenue field, and therefore, the expenses should have been allowed as being purely revenue in nature. b) It is submitted that during AY 2012-13, the Appellant had two outlets at Colaba and Bandra, which had been operational since the year 2004 and 2009 respectively. The Appellant was in the process of opening other outlets across Mumbai for sale of its bakery and confectionery products at additional locations, and to cater to the increased demand which would arise upon opening of such new outlets, the Appellant took over an additional bakery premises called 'Jalal Bakery' which was in an old and dilapid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are revenue expenses, a detailed schedule listing out and providing narration for all the expenses incurred by the Assessee for the AY under consideration and treated as revenue expenses, including the expenses amounting to Rs. 92,66,827/- which were disallowed by the Ld. AO, is hereto annexed as Annexure B. Attention of Your Honour is more specifically invited to the entries in the said Annexure B at Serial No. 6 and Serial No. 10, as these pertain to the Bandra shop and the Bandra bakery expenses disallowed by the Ld. AO. f) It is submitted that the Ld. AO has completely failed to apply his mind to the facts and circumstances surrounding the claim of the Assessee that the expenses incurred by it are revenue in nature. The same can be very clearly illustrated as follows, by listing out some of the expenses which the AO has treated as capital expenses in nature - i. Payments made by the Assessee towards society maintenance charges to 'Link Square Premises Co-op. Society Ltd.' in respect of its Bandra bakery and outlets; ii. Payment made to architect and structural engineer for supervisory and consultancy charges; iii. Payments made to 'Anukool Gas Service' f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained as to how the test of enduring benefit is not conclusive: " What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." i) Even in the present case, the renovation, repair and maintenance expenses which are incurred by the Appellant are only for facilitating the Appellant's trading operations inasmuch as the production capacity of bakery and confectionery products, the sale of which constitutes the business of the Appellant is enhanced pursuant the said expenses b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Talathi and Panthaky Associated Pvt. Ltd., [(2012) 343 ITR 309 (Bom)]. A copy of the judgement in Talathi and Panthaky Associated Pvt. Ltd. is hereto annexed for Your Honour's perusal as Annexure H. I) The Hon'ble Delhi High Court has also taken a similar view inter alia in Instalment Supply P. Ltd. v. CIT, [(1984) 149 ITR 52 (Del)] and CIT v. Hi Line Pens Pvt. Ltd., [306 ITR 182 (Del)]. m) Based on the above factual and legal submissions, it is reiterated that expenses of the Appellant on repairs and maintenance of the business premises of the Appellant are revenue expenses and not capital expenses and hence, deduction in respect thereof should be allowed by deleting the addition made by the Ld. AO. The claim of the Assessee 7. Thus, it is respectfully submitted that the findings arrived at by the Ld. AO in the present matter with respect to the impugned addition of Rs. 82,90,912/- are incorrect, and contrary to the applicable facts, circumstances and law, and the assessment order passed by the Ld. AO is thus unsustainable and bad in law, warranting that the same be set aside. 8. The Appellant Company craves leave to add, alter, amend or modify the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This was taken on lease hold for 5 years period with a monthly rental of Rs. 100.000/-. As per the agreement dated 26/05/2011, clause 10, the appellant was permitted to install assets, articles, amenities, furniture, fixtures, air-conditioning plants, industrial ovens and other equipments and to renovate the premises including tiling, flooring etc. Further, as per clause 12 of the agreement the appellant was prohibited to carry out any construction or erection except wall, partitions, toilets etc., and was permitted to carry out repairs, renovation and interior work. 5.2.4 The basic contention of the appellant is that the entire expenditure of Rs. 92,66,827/- did not lead to creation of new asset of enduring benefit and hence, it was allowable under section 37(1) of Income Tax Act, 1961. In this, the appellant has relied on the judgement of the Apex Court in the case of Empire Jute Company Ltd v CIT, 124 ITR 1 (SC), which has been quoted above. Further, the appellant also relied on CIT v Madras Auto Service (P) Ltd. 233 ITR 468 (SC) which held that expenditure incurred on renovation of a leasehold building has to be treated as revenue in nature. The appellant also relied on jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Sugar Mills Co. (P.) Ltd. v. CIT[1971] 82 ITR 376 (SC) , L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293/4 Taxman 5 ($C) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 /38 Taxman 11OA (SC) the Supreme Court observed as follows: "All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation 1 is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation 1 brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasised is that the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion: * CIT Vs. Hede Consultancy Pvt. Ltd. (2002) 258 ITR 380 (Bom) * Nila Products Ltd. vs. CIT (1984) 148 ITR 99 (Bom) * MDCIT V/s Sandoz (P.) Ltd. (2012) 137 ITD 326(Mum.) * Cymroza Art Gallery V/s ACIT (2013) 21 ITR (Trib) 262 (Mum) * DCIT V/s Bijesh Thakkar (2012) 49 SOT 502 (Mum.) * Instalment Supply P.Ltd V/s CIT (1984) 149 ITR 52 (Del) * CIT V/s Dr.A.M.Singhvi (2008)302 ITR 26 (Raj) * CIT V/s Ayesha Hospitals P.Ltd (2007) 292 ITR 266 (Mad) * ACIT V/s M.M.Publications Ltd. (2011) 43 SOT 59 (Cochin) 5.2.7 In view of the above facts and circumstances, the net disallowance of Rs. 82,09,912/- (after depreciation) is deleted. This ground of appeal is allowed." 6. The Revenue is aggrieved by the appellate order dated 28.10.2016 passed by Ld. CIT(A) and it was at the outset submitted by learned DR that there is a breach of Rule 46A of the Income-tax Rules, 1962 by learned CIT(A) as the assessee submitted before learned CIT(A) certain additional evidences which were admitted by learned CIT(A) in breach of Rule 46A of the 1962 Rules and the same were also not forwarded to the AO for their verification and rebuttal by the AO as no remand report was called by lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns etc. which should be allowed as revenue expenditure. It was submitted that powers of Ld. CIT(A) powers are co-terminus with powers of the AO and hence he could have made the inquiries with respect to additional evidences filed by assessee and it is not necessary that remand report from the AO be called by learned CIT(A) in every case on additional evidences submitted for the first time before learned CIT(A). The learned counsel for the assessee would rely on following case laws: a) Hon'ble Bombay High Court decision in the case of Rallis India Limited v. CIT reported in (2015) 374 ITR 462(Bom.) b) Hon'ble Delhi High Court decision in the case of CIT v. Manish Buildwell Private Limited reported in (2011) 245 CTR 397(Del.) c) Hon'ble Supreme Court decision in the case of CIT v. Kanpur Coal Syndicate in Civil Appeal No. 673 of 1963, judgment dated 30.04.1964 d) Hon'ble Bombay High Court decision in the case of CIT v. Hede Consultancy Private Limited reported in (2002) 258 ITR 380(Bom.) e) Hon'ble Bombay High Court decision in the case of CIT v. Talathi and Panthaky Associated Private Limited reported in (2012) 343 ITR 30(Bom.) 7. We have considered rival contentions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains of business or profession". [ [Explanation 1.]-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.]" Admittedly , the assessee has during the course of appellate proceedings before learned CIT(A) submitted for the first time additional evidences which were admitted by learned CIT(A) while adjudicating appeal of the assessee in favour of the assessee .These additional evidences are by way of invoices and bills concerning these expenditure which found mentioned in the appellate order of learned CIT(A) at page 8. The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.]" The Ld. CIT(A) also did not refer/forwarded these additional evidences to AO for verification and comments as no remand report was called by learned CIT(A) from the AO. This is a breach of sub-rule 3 of Rule 46A of the 1962 Rules owing to non forwarding of these additional evidences by learned CIT(A) to the AO for its verification and comments. The principles of natural justice are clearly breached. The procedures as are contemplated are not meant to stifle justice but they cannot be simply given go-bye otherwise there will be break down of Rule of Law . Rule of Law is an important ingredient of basic structure doctrine engrained in our Constitution . The assessee ought to have explained before learned CIT(A) as to what pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te so far as powers of the learned CIT(A) to be co-terminus with the powers of the AO. The instant case before us is also not a case where an enquiry is initiated by learned CIT(A) suo moto or directions are issued to the AO to conduct inquiry by invoking powers u/s 250(4) of the 1961 Act. The case before us is where additional evidences are submitted by the assessee of its own for the first time before learned CIT(A). The Said sub-section 4 of Section 250 is reproduced hereunder for ready reference: "(4) The [***] [Commissioner (Appeals)] may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the [Assessing] Officer to make further inquiry and report the result of the same to the [***] [Commissioner (Appeals)]." The case before us is also not covered by sub-rule 3 of Rule46A of the 1962 Rules as we have seen that these additional evidences are not been filed on the directions of learned CIT(A). Had the assessee been directed to file additional evidences as is contemplated by sub-rule 3 of Rule 46A of the 1962 Rules, then the requirement to forward the same to the AO for verifications or comments could have been dispensed with. This is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee." The terms and conditions of the lease agreement entered into by the assessee becomes relevant as to whether the lease agreement is renewable after five years or not and secondly, whether as per terms of lease agreement, the assessee will get ownership rights over the assets created vide renovation in the premises or the ownership of assets created vide these renovation expenses vests with lessors. Neither , the said lease agreement nor invoices/details for conducting these renovation expenses are filed before the tribunal. It is purely a finding of fact which is to be gathered from the cumulative study of lease agreement, invoices , nature of renovation done by assessee and other applicable relevant facts and circumstances surrounding the renovation of the premises undertaken by the assessee to arrive at conclusion whether benefit and advantage of enduring nature was obtained by the assessee or not. Then only conclusion can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra) and Hede consultancy (P.) Ltd. (supra). In Talathi & Panthaki Associates (P.) Ltd. (supra) the tenant of the premises had contributed a sum of Rs. 1.50 crores to the work of repairs and restoration/reconstruction of the building in which it was a tenant. The entire amount of Rs. 1.50 crores was claimed as revenue expenditure. The assessee therein had entered into an agreement with the developer to contribute Rs. 1.50crores for the reconstruction/repairs/restoration of the building in consideration of there being no increase in the rent payable by the assessee in the new structure to that being paid in the old structure. It was in the aforesaid facts that it was held that where a lump-sum payment of Rs. 1.50 crores gets rid of annual business expenses chargeable against revenue then the lumpsum is to be regarded as a revenue/business expenditure. The benefit obtained by the assessee in the above case was premises at a lower rent in view of the contribution made to the developer for repairing/reconstructing the premises. Thus, the expenditure was in the revenue field and allowable under Section 37 of the Act. In the present facts, nothing is on record to indicate that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not include any expenditure which is in the nature of capital expenditure. Although this Explanation to Section 30 of the Act was introduced in 2004 w.e.f. 1st April, 2004, the Explanation itself clarifies that it has been introduced for removal of doubts. Therefore, it would be applicable even for the period prior 1st April, 2004 including the subject Assessment year. It is for the above reason the learned Counsel for the appellant very fairly did not even attempt to suggest that deduction under Section 30 of the Act would be available even in respect of capital expenditure. 10. In the above view, the concurrent finding of fact by the Authorities under the Act that the expenditure incurred claiming to be the repairs and maintenance was in fact on account of renovation of the premises, leading to enduring benefit to the appellant assessee in as much as it enabled the appellant to accommodate larger number of employees and also facilitate its trading operations. This benefit would be available to it for a long period of time and thus, was capital in nature. It was in the above view that the Tribunal granted the benefit of depreciation to the extent the claim as revenue expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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